Nov. 4, 2022 "Five almost guarantees in the investing world other than boring GICs": Today I found this article by Peter Hodson on the Financial Post:
Guaranteed investment certificates (GICs) are amongst the only real guarantees in the investment world today.
If you invest $100,000 or less, your money is fully guaranteed by the Canada Deposit Insurance Corp. — of course, you might lose purchasing power to inflation, but that’s a topic for another day.
But don’t worry, we’re not going to talk about boring old GICs. Frankly, we would rather take a chance on the stock market than be bored to death with fixed-income investments. But that’s just us. Others clearly disagree since GICs are suddenly becoming very popular as rates rise and markets fall.
Instead, we are going to talk about other guarantees, or pseudo-guarantees, in the investment world. They may not be guarantees in the defined sense of the word, but they nonetheless happen with enough regularity to be considered as such.
A tax-loss sell is a guaranteed win (through tax savings): Suppose you have lost $10,000 on a stock this year and are in a 50-per-cent tax bracket.
Sure, the loss hurts, but if you sell that stock before year-end, you can write off the loss this year against other gains.
The loss can be carried back three years, or carried forward forever.
Yes, you have lost $10,000, but you have picked up $2,500 in tax savings,
as long as you have some prior — or future — gains.
Most investors are extremely reluctant to sell stocks for a loss. After all, it’s a final admission of defeat. But we encourage it.
The tax saving is a guaranteed win created from a bad situation.
Depending on your situation, if you have losses in prior years, you could even get a tax refund from claiming a loss. This can certainly help the pain of the bear market.
Headlines will be very bad at the bottom: Many investors right now are waiting for the market to bottom out. There is lots of cash on the sidelines, investors hate everything and the doom and gloom, despite a few weeks of normalcy in the market, remains prevalent.
Sorry, we can’t tell you when the bottom will be. As they say, no one rings a bell at the bottom. But we can guarantee you this: the news will be very bad when the market bottoms.
Headlines will scream recession, war, lower earnings, inflation, interest rates or whatever. But all the news will be bad on the day the market stops falling. This I can guarantee you. I remember March 2009 well. After a devastating financial crisis, I couldn’t really find a decent piece of news anywhere. I couldn’t find a bullish investor at any conference I attended, or among anyone I spoke to. The world — at least for investors — truly looked to be ending. But then it didn’t.
Declining stocks will get downgrades and lowered targets: I don’t like picking on Bay Street and Wall Street analysts so much, but this is simply too easy: after a company has problems, or its stock declines, analysts will fall all over themselves trying to downgrade the stock — again, after the fact.
We see this so much it is almost comical. A stock falls 45 per cent and then the analysts drop their target prices.
Let’s look at poor Meta Platforms Inc. Less than a year ago, the average analyst target price was US$405 per share. Now, after a 71 per cent plunge in the stock, the average target price is US$146.
After weak results last week, nearly every analyst lowered their targets — again. We get that companies sometimes surprise investors with bad results.
But analysts moving their targets lower as stocks decline practically guarantees investors will miss the turn when it occurs.
Like the bad news theme above, it usually spells opportunity when everyone hates a stock.
A lower share price guarantees dilution: A declining stock price for some small companies can be a death spiral.
Why? Because the amount of capital a company needs does not change depending on its stock price.
Suppose a company needs $10 million to execute its business plan, and its stock is $10 per share.
No problem, it needs to sell one million shares to meet its goals.
But what happens, in a year like 2022, if its stock declines to $1 per share? It still needs $10 million, so now it needs to sell 10 million shares.
More share dilution is guaranteed if the company really needs to raise money.
As a result, many small-cap stocks, once they start dropping, keep dropping.
Investors get worried about more and more shares being issued, and some will sell as they anticipate a financing round.
This is why looking at a company’s balance sheet and cash flow is so important for investors.
Don’t get yourself into a situation where a company needs money at the wrong time, such as when its stock is way down.
Small caps lead the market higher: We will end on a positive note. This is not quite as strong a guarantee as the four points above, but history is definitely on our side here.
In the past 10 recessions, small-cap stocks have led the market out of its slump, outperforming all other categories in the first year following recessions. Ten for 10.
We have no doubt this will occur again. That’s because small-cap stocks were hit very hard, very early, in the downturn.
Many stocks are down 80 per cent in a year.
Yet relative to large-cap stocks, small caps are both cheaper and growing faster.
Historically, small caps are always more expensive than large caps on a price-to-earnings basis, because of their faster growth.
But small caps are now back to 2008 levels, at least in terms of relative cheapness to large caps.
As scared investors flocked to the so-called safety of large caps, they have left the small companies behind.
This can create big opportunities. One day in the future, investors might look back on the small-cap sector and say, “Wow, they were so cheap, why didn’t we buy them?”
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)
Five almost guarantees in the investing world other than boring GICs | Financial Post
Who takes investment advice from the same people who tanked your portfolio?
“… after a company has problems, or its stock declines, analysts will fall all over themselves trying to downgrade the stock — again, after the fact. We see this so much it is almost comical.”
It is actually hilarious. I have noticed this for years, and lately people are having fun with “Inverse Cramer” investing. But the thing that is funniest is when they upgrade from “Sell” to “Hold”. How are you supposed to “Hold” when you just sold?
Oct. 13, 2023 "It’s never too early to think about tax-loss selling": Today I found this article by Dale Jackson on BNN Bloomberg:
The leaves are still on the trees in many parts of the country, but that shouldn’t stop investors from thinking about the year-end deadline for tax-loss selling.
Tax-loss selling brings an opportunity to
use 2023 stock market losses to recoup tax paid on capital gains in the past three years,
or reduce tax on capital gains any year in the future.
Because half of capital gains on equities sold in a non-registered trading account are taxed,
half of capital losses can eliminate the taxes on capital gains dollar-for-dollar.
As an example; if you accumulated $10,000 in capital gains on equities sold last year
and claimed the required $5,000 as income,
$10,000 in capital losses will get you a full refund.
WHY AN EARLY STRATEGY IS IMPORTANT
Tax-loss selling is pretty straightforward from a tax perspective but it can get complicated from an investment perspective.
The last thing you want to do is sell a good stock that is in a short-term slump to save a few tax dollars.
A qualified advisor can help isolate the sleeping giants from the dogs, and you still have several weeks to track their performance.
With the third quarter behind us, there is one last chance to evaluate a company’s most current financial health as we head into earnings reporting season.
If the investment you want to dump is an equity mutual fund
or exchange traded fund (ETF),
be careful not to throw the baby out with the bathwater.
In other words, don’t sell a good portfolio if a few laggards are dragging it down.
Timing is also an important consideration for tax-loss selling. With the TSX Composite Index at about break-even for 2023 so far, and a decline of eight per cent in 2022, there are probably plenty of losers to choose from this year.
But you might need to go back to 2021, when the TSX advanced by 22 per cent, to find winners that have been taxed.
Tax paid on capital gains can only be recouped by capital losses going back three years, which means your options could be limited if you wait until 2024.
BEWARE OF THE SUPERFICIAL LOSS RULE
As with any tax strategy, the Canada Revenue Agency (CRA) has strict rules when it comes to tax-loss selling.
The most important is called the superficial loss rule, which prohibits the repurchase of the same stock within thirty days of the tax loss sale.
The superficial loss rule applies to repurchases in any registered or non registered account in the name of the account holder, and even the account holder’s spouse.
If you want to repurchase the same stock you must wait at least 31 days from the sale.
USING A TFSA AND RRSP FOR MORE TAX SAVINGS
It’s important to note that tax-loss selling, or tax on capital gains does not apply to investments in
registered accounts including a registered retirement saving plan (RRSP)
or a tax free savings account (TFSA).
The tax savings from tax-loss selling,
however, can generate further tax savings by shifting the proceeds from a non-registered account to registered accounts.
While half of capital gains are taxed in a non-registered account,
the tax on capital gains in a TFSA is zero.
Capital gains in a RRSP are fully taxed when withdrawn in retirement along with income and original contributions,
but investors are permitted to deduct their contributions from their taxable income.
RRSP contributions made before the March 2024 deadline can be deducted from 2023 income
or carried forward to future years when your tax burden is heavier.
With both the RRSP and TFSA, capital losses don’t apply from a tax perspective because capital gains are never directly taxed in the first place.
There are other specific rules set out by the CRA for tax loss selling and contributing to registered accounts which must be followed, so consider speaking with a tax professional.
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